Oil industry warns of supply chain breakdown

Foreign banks refuse to accept LCs for oil import by Pakistani firms

ISLAMABAD:

A major oil industry lobby has warned of impending breakdown in the energy supply chain as companies are facing financial crisis following refusal of international banks to accept Letters of Credit (LCs) opened by Pakistani banks.

In an SOS call, Oil Companies Advisory Council (OCAC) Chairman Waqar Irshad Siddiqui revealed that the oil industry had come under financial strain, raising the spectre of breakdown in the country’s energy supply chain.

Earlier, in a letter to the Ministry of Energy (Petroleum Division) on May 26, the OCAC highlighted that international banks were refusing to confirm the LCs opened by Pakistani banks.

In the SOS call on May 30, the OCAC chairman pointed out that the situation had not improved at all despite the help from the State Bank of Pakistan (SBP).

Also, “the 0.75% turnover tax on petroleum is unsustainable for the industry, which has been consistently supporting the government through the difficult times since the imposition of price differential claims (PDC),” he said.

He requested for convening an urgent meeting between the government and the oil industry. In the May 26 letter, the OCAC chairman drew the attention of authorities to the financial challenges threatening oil supply.

He pointed out that there had been extraordinary efforts and commitment demonstrated by the relevant government offices and the oil industry in sustaining the fuel supply chain effectively through the PDC period.

“Unfortunately, the country’s fuel supply is now also being severely threatened by the limited credit facilities, high inflation and interest rates and increasing USD-PKR parity,” the chairman said, adding that the financial predicament left the oil industry extremely vulnerable and fragile.

He called for taking immediate remedial measures for the targeted areas of concern.

Discussing the reluctance of international banks to confirm the LCs for oil imports, the OCAC chief argued that it had impacted both the refiners as well as oil marketing companies (OMCs).

“We request you to arrange an urgent meeting of the oil industry with the minister of finance. There are some credible solutions and proposals that could be considered for implementation,” he added.

The financial health of oil refineries and OMCs has already been hit by the earlier decision of the government to keep petroleum prices unchanged.

The government has estimated payment of Rs118 billion to the refineries and OMCs on account of PDC for May 2022.

It has approved the release of almost half of the amount. The government has also made a massive increase in prices of petrol and high-speed diesel to avoid the accumulation of PDC.

The Russia-Ukraine war is the major reason behind the surge in crude oil prices in the global market. Pakistan is a net importer of oil and the increase in prices in the international market impacts the domestic oil prices as well.

According to industry sources, the rupee’s free fall against the US dollar and other currencies, along with the state of Pakistan’s economy, has forced foreign banks to restrict financing facilities for Pakistani companies.

They stressed that the hesitation on the part of foreign banks was leading to an oil import crisis, impacting the oil refineries and OMCs the most.

The oil sector has already been facing financial trouble because of the rising circular debt, lack of financing facilities from domestic banks and currency depreciation.

Published in The Express Tribune, June 1^st, 2022.

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